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About the Podcast:
David C Barnett discusses buying and selling small businesses, franchise issues, doing private lending deals, investing in small businesses, small business finance, machinery & equipment sales and appraisals, real world start-ups, home economics, personal finance, negotiation, business systems, entrepreneurship, SME, M&A, private equity, permanent equity, business models. David does not discuss individual stocks or mutual funds.
About The Speaker:
David C. Barnett is a small business expert, consultant, and author. He specializes in buying, selling, financing, and managing small and medium-sized businesses. With years of experience in the industry, David provides valuable insights and advice to entrepreneurs and business owners.
Summary:
In this episode, David C. Barnett answers a subscriber's question about the price one should pay for a business compared to the risks involved in staying in a job. He discusses the concept of multiples in small business pricing and emphasizes the importance of understanding the context and size of the business being evaluated. David also explores the risk factors associated with owning a business versus being a W-2 employee and provides insights on how to manage and mitigate those risks.
Key Takeaways:
- Understanding the context and size of a business is crucial when evaluating pricing multiples.
- The average multiple for businesses under half a million in SDE is around 2x.
- Risk in owning a business is spread across the customer base, whereas losing a job means losing 100% of income.
- The real risk in owning a business is not losing customers but not acquiring enough customers fast enough.
- Risk tolerance varies among individuals, and it should be considered when determining the type of business to buy.
Quotes:
- "The question of risk: having a job versus a small business. If you lose your job, you lose 100% of your income." - David C. Barnett
- "The real risk is in not getting enough customers fast enough." - David C. Barnett
The Article:
How2Exit Reviews: "The Price of Risk" by David C. Barnett
Hello, How2Exit listeners and readers! Today, we're diving into a podcast episode that's a must-listen for anyone navigating the small business landscape. David C. Barnett, a renowned small business expert, consultant, and author, tackles the complex issue of risk assessment in buying a business versus staying in a salaried job.
The Central Query: What's Your Risk Worth?
David starts the episode by addressing a listener's question about the appropriate multiple of Seller's Discretionary Earnings (SDE) to consider when buying a business. He sets the stage by contextualizing the question within the broader small business market, a move that adds depth to the discussion.
Valuation Insights: What's a Business Worth?
One of the episode's highlights is David's reference to the IBBA Market Pulse Report. He uses this data to discuss the median multiples for businesses with less than $500,000 in SDE, which have remained around 2x. David wisely notes that these multiples are specific to the Main Street segment, and he distinguishes this from the lower Middle Market segment, where multiples can range from 3.2x to 4x.
Risk Factors: Job Security vs. Entrepreneurial Freedom
David then delves into the risk variables of buying a business as opposed to remaining in a W-2 job. He makes an excellent point that while a job loss equates to a 100% loss of income, owning a business distributes the risk across a diverse customer base. This is an invaluable insight that resonates with our own views at How2Exit.
Industry-Specifics: The Devil's in the Details
David also explores how industry and business characteristics can influence pricing. He discusses factors like capital intensity, recurring revenue, and barriers to entry, and how they play a role in determining a business's value. This is a nuanced take that adds another layer to the conversation.
Key Takeaways: Knowledge is Power
David wraps up the episode by emphasizing the importance of being informed and prepared. He advises buyers to rely on market data and trends to make educated decisions. Sellers, too, should align their asking prices with market trends, a point we couldn't agree with more.
Our Verdict
David C. Barnett's episode is a comprehensive and insightful guide for anyone considering buying or selling a small business. His expertise shines through, making complex topics accessible and understandable. If you're in the small business sphere, this episode is not to be missed. It's a masterclass in understanding the intricacies of risk and valuation in the small business market.
Watch it here: https://youtu.be/DArwVgBI3hU?si=uM7JHzkKEKwChZXg
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